Defensive play with selective bright spots

MALAYSIAN real estate investment trusts (REITs) are poised for steady, if not spectacular, growth in the medium term, as monetary policy, economic uncertainties and sector-specific factors shape their fortunes.

Although interest rates hold steady for now, analysts see room for opportunities, especially as the market eyes a potential rate cut later this year.

Public Investment Bank (PIB) Research, Maybank Investment Bank (IB) Research, and MIDF Research each weigh in on the sector’s prospects, with their latest notes painting a picture of cautious optimism sprinkled with select bright spots.

PIB Research highlights the monetary backdrop, noting that “Bank Negara’s decision to cut the statutory reserve requirement (SRR) from 2% to 1% effectively releases around RM19bil of liquidity into the banking system.”

It adds: “We have now revised our base case to include a 25 basis points (bps) overnight policy rate (OPR) cut in the third quarter of 2025 (3Q25), contingent on the reciprocal tariff suspension being upheld and domestic conditions remaining broadly stable.”

While PIB Research expects the move to ease funding costs, it sees a modest impact on REITs’ earnings – 1% to 2% – given the sector’s partial exposure to floating-rate debt.

“Although we still believe the sector is fairly-valued for now and maintain our ‘neutral’ stance, attractive dividend yield of around 5% looks sustainable,” PIB Research notes.

Among its coverage, Sunway-REIT stands out thanks to its diversified asset base and growth plans under its Transcend 27 roadmap, which aims to boost its asset size from RM10bil currently to RM14bil-RM15bil over the next few years. PIB Research also sees resilience in Sunway-REIT’s retail space, pointing to full contributions from the new assets added last year, including 163 Retail Park and Kluang Mall, plus an industrial asset in Prai, Penang.

Looking at broader economic conditions, PIB Research flags that Bank Negara’s May statement highlights a deeper economic slowdown in Malaysia’s major trading partners, weaker sentiment amid elevated uncertainty, and lower-than-expected commodity production as the primary downside risks. Despite the steady OPR at 3%, the SRR cut signals a pre-emptive policy shift to support liquidity.

Among its REIT coverage, Sunway-REIT has around 52% of its loans on floating rates, Axis-REIT about 46%, while IG- REIT’s debt is entirely fixed-rate – meaning the impact of any rate cut will vary.

Overall, PIB Research expects the sector to remain resilient amid market volatility. It notes that the average KL REIT is now yielding around 6%, which it sees as attractive compared with government bonds. However, it is cautions that rental reversions could remain flat near term due to new mall completions and lingering trade uncertainties.

Yield accretive

Meanwhile, Maybank Investment Bank (IB) Research is slightly more upbeat, retaining a “positive” call on M-REIT. The research hosue likes the attractive 2025/2026 average dividend yields of 5.6% and 6.1%, respectively, which translate into healthy spreads of 208 bps to 258 bps against the current 10-year Malaysian Government Securities’ (MGS) yields of around 3.5%.

Matybank IB Research sees room for spread compression if Bank Negara cuts the OPR in the second half of 2025, which would benefit REITs with higher floating-rate debt.

It also sees opportunities for selective growth through yield-accretive acquisitions, while cautioning that management across the sector maintained a cautiously optimistic outlook, flagging several macro uncertainties such as the potential implementation of an 8% service tax on rental as well as potential increase to electricity tariffs and broader economic uncertainties.

Operationally, Maybank IB Research says: “M-REITs delivered broadly in-line 1Q25 results, with notable year-on-year earnings growth from Axis-REIT, Sunway-REIT, CapitaLand Malaysia Trust (CLMT) and Pavilion-REIT, driven by positive rental reversions, improved occupancy rates, and contributions from newly acquired assets.”

It highlights that Sunway-REIT is its top pick, followed by Pavilion-REIT and Axis-REIT for their income resilience and defensive asset base.

Looking ahead, Maybank IB Research expects catalysts in the second half, including asset recycling (for instance Sunway-REIT’s planned RM613mil disposal of its tertiary education asset, Axis-REIT’s RM24mil sale of The Annex) and new acquisitions (for instance, Pavilion-REIT’s RM480mil hospitality assets).

The research house also highlights that active asset enhancement initiatives by Sunway-REIT and IGB-REIT should further support income growth. Notably, KLCCP Stapled Group and Sunway-REIT could see a seasonal rebound in hospitality after Ramadan, while strategic moves such as CLMT’s diversification into logistics and Sentral-REIT’s pivot away from pure office exposure could support medium-term growth.

Income-hungry

MIDF Research, however, is more cautious, downgrading its sector view from “positive” to “neutral”.

“We think that most of the positives for REIT are largely priced in at this level,” it says.

While MIDF Research acknowledges that most REITs staged a solid earnings recovery in 2023 and 2024, it sees moderate earnings growth ahead, given that the sector has largely normalised post-pandemic.

“Yields of REITs under our coverage tapered to 4.6% following increase in share prices of REIT recently,” MIDF Research adds.

It singles out Pavilion-REIT as its top pick with a target price of RM1.69, citing support from positive rental reversion of Pavilion KL Mall while performance of Pavilion Bukit Jalil is expected to remain stable.

Conversely, it downgrades Sunway-REIT and Axis-REIT to “neutral”, citing limited upside after share price rallies, although it still sees solid earnings from Sunway-REIT’s retail division and steady demand for Axis-REIT’s industrial assets.

Taken together, the brokers agree that M-REITs remain a defensive play amid global uncertainties, but with pockets of opportunity for income-hungry investors. Interest rate movements could act as a swing factor later this year, potentially improving sentiment, especially for REITs with floating-rate debt. But for now, valuations mostly reflect the sector’s resilience –and the hunt for sustainable yields continues.

As PIB Research aptly puts it: “We believe the sector will remain attractive to those searching for higher yielding stocks.”